In need of stimulus

When food prices are driving inflation, an investment fillip is the answer.

The decline in the investment rate in India started two years ago. (Source: Reuters)

We need to aim to get to a high growth path again. To use an expression made famous by Queen Elizabeth, the last two years were both anni horribili. The average annual growth rate of the economy was 7.49 per cent between 2004 and 2012-13 — the UPA years. But it fell from 7.9 per cent between 2004 and 2008 to 6.8 per cent between 2009 and 2014. The last two years were really bad at 4.65 per cent. The manufacturing sector grew 8.34 per cent annually in the period 2004 to 2012-13, but 9.28 per cent in the period 2004 to 2008. This dropped to 7.18 per cent between 2008-09 and 2012-13. Again, the last two years were terrible at around 4 per cent and then below zero per cent. The official line was that we are now a globalised economy and can’t do much about the rest of the world. But many other countries have done well — not just China but also countries like Indonesia, Turkey and Nigeria. The decline in the investment rate in India started two years ago. Public investment fell first, and as infrastructure spending went down, private investment also fell.

The UPA’s economists kept giving lectures about raising efficiency. They wondered, if the investment rate is 32 per cent, why was the growth rate so low? (C. Rangarajan ). They conjectured that the growth rate would go up next month/ quarter (Montek Singh Ahluwalia). Raghuram Rajan had another tack. According to his economics, the growth rate is given and all that you can do is determine prices by changing the interest rate. Whenever some green shoots of recovery were visible, the monetary policy killed them.

In August last year, China effected a stimulus package by investing in infrastructure. There were howls of protest from international financial institutions. But China politely stuck to its policy and clocked 7 per cent growth. I have been arguing for an investment stimulus along with a resource-raising effort. It would not have determined aggregate demand but would have diverted demand to sectors linked to infrastructure, like capital goods, cement and steel. The private sector would have taken care of consumer demand, thanks to the good crop in the offing. But nothing happened.

The new government must focus on infrastructure investment and give the economy a stimulus. It must simultaneously raise resources and cut government consumption expenditure to finance this stimulus.

The need for a public investment stimulus in infrastructure is greatest in what I have described in my book, The Future of Indian Agriculture, as “Census towns”. There are about 4,000 such towns. Going by criteria laid down by the Census, they are towns, but the government does not classify them as such because of the politics of keeping them under panchayats. Since they are not governed by municipal bodies, they are not eligible for urban infrastructure. These towns are crying out for roads, markets, first-stage agro-processing infrastructure, storage facilities and financial intermediation for small farmers and traders. But they remain “villages”. A large infrastructure package for them is the need of the hour. The decline in agricultural growth, from 4 per cent per year between 2004 and 2008 to 3.28 per cent between 2009 and 2012, should warn policy planners. Infrastructure is the name of the game when the inflation rate is largely in food and energy. This is the area to concentrate on. The quicker we cross the 34 per cent investment rate mark, the better it will be for us.

Another area that needs significant attention is skills development. For this, the private sector, NGOs, cooperatives, industry associations and others must be roped in in a big way. Every skill development programme must have a certification process, preferably overseen by the local chamber of commerce so that trainees can get jobs and the country’s skill deficit can be removed.

The water, energy and communication sectors have also been starved of investment. India has no right to call itself a powerful emerging economy if it does not invest in these sectors and liberalise them so that private players can also participate in them.